In 2016 I joined a group of professional investors who traveled to Bangladesh to study emerging markets. When we left the exchange in Dhaka we had to pass some people who were prone to a dead body on the street.
In the evening, as we sat in the hotel bar, we were suddenly spotted on television. The bartender translated the news broadcast. There was no word of death. The story read: “Foreign investors have been seen visiting the Dhaka exchange – a market moving 10 per cent higher.”
This highlights the risks of investing in emerging markets and how easily they can be shifted. But there is also the potential for improved productivity, of course, and we might expect to grow even faster with the world in recovery mode.
The big investment story in the last 30 years is a rise in China. It has become the factory of the world, the place where companies move production to take advantage of low labor costs, so for several years it has achieved double-digit annual growth.
Demographics have played its part, with waves of young people, better educated and healthier than previous generations, joining the workforce. But those waves are now slowing. Birth rates are declining in China, with a much smaller influx of workers and an aging population in need of care.
It is also at the stage where the law of large numbers begins. It is much more difficult to grow 10 per cent a year from a high base to a low base. Also, as the economy grows, wages rise and the competitive gain on labor costs begins to disappear.
This is where many of the “emerging markets” are today. They have already appeared. Three-thirds of the MSCI Emergency Markets Index are held in three countries: China (40 percent), South Korea (13 percent) and Taiwan (13 percent).
With economic margins each of $ 11,000, $ 31,000 and $ 27,000 respectively, these countries are already somewhat developed. They compare to India (9 per cent of the index) at $ 1,800 and Brazil (4 per cent) at $ 6,400. The UK figure is $ 39,000, at least.
So are you investing in a growth story as fast as you think when investing in emerging markets? And what about the core companies?
A small number of large businesses can be controlled by an emerging index and market assets. Taiwan Semiconductor accounts for 6.6 percent of the MSCI index and Tencent another 6 percent.
We own both in our global equity funds; the first because it is the leading manufacturing company of the most advanced semiconductors in the world. We would keep it for that purpose no matter what stock market was mentioned. It is a worldwide leader and plays a major role in global trade.
It is important, then, to understand that what you buy when you invest in an emerging market vehicle is somewhat similar to a typical U.S. asset: for the most part collection of tech stocks around the world.
Growth prospects
In fact, this may give investors confidence. These are good companies, and their hospitality economies are expected to grow strongly this year. China is expected to grow by more than 8 percent (up from 2.3 percent growth last year). According to the IMF, India’s economy could grow 11.5 percent this year (after a 4.5 percent fall in 2020). In contrast, the UK economy should recover just 4.5 per cent, following a 10 per cent decline last year. The U.S. is expected to grow 5 percent after falling 3.4 percent in 2020.
Wider global growth will also bring benefits. Demand for Chinese manufactured goods and Latin American minerals is rising, as seen in the copper price almost doubling in the past year.
But this may not translate into investment success. Market indices have failed so far this year. Shanghai’s market in sterling terms is down nearly 5 percent and Brazil’s down nearly 10 percent, while the UK’s FTSE is 4 percent higher and the S&P 2.7 percent higher.
The Chinese market may be suffering from investors thinking there is no recovery potential. After all, it didn’t fall off much. Indeed, during the recent National People’s Congress there was talk of cooling the economy, as it was growing too strong. A conventional economy has thus led investors to sell: they would rather promise big spending regardless of inflation, which is similar in developed markets. These are weird times to invest.
Brazil highlights another of the key threats to emerging markets – politics. The country has been having a hard time with the pandemic, and last month its controversial president, Jair Bolsonaro, replaced the head of the state oil company Petrobras with an army chief. Investors in Petrobras have lost nearly 20 percent of their money in local currencies and 25 percent in very good terms, despite rapidly rising oil prices.
On that same trip to Bangladesh we also visited Myanmar. We were one of the first visitors to their exchange. A local guide proudly handed out the set of rules that governed it – the London Stock Exchange rulebook from 1938. He explained that the exchange was open for an hour before lunch five days a week. Stocks were not listed then. Due to the cup in January, I don’t think I’ll be going back for an update.
Looking further afield
It can be argued that those seeking traditional emerging markets need to look at “end markets”. Vietnam, while continuing to run a communist political system, is increasingly developing the equality market. Thai markets are well established and Cambodia has ambitions as well.
The Middle East and East Africa continue to see economic growth driven by young populations. Here, oil companies control the indices along with the banks and engineering companies that supply them, making it difficult for any investor to access the domestic economic potential. At the same time, Eastern European markets have been developing in Ukraine, Romania and Bulgaria and are slowly attracting a wider range of companies.
One country I would be in a hurry to visit is when it opens Cuba. It could be a huge emerging market, but you need to beat the Miami investment professionals to the best of your chances.
You may eventually decide that you want to be open to both emerging markets and emerging markets. There are better experts than me in both areas. I would just say – make sure you understand what you are buying. And if it’s the latter, take good guidance and planning for a long trip. In other words, invest in expertly run funds and become a long-term investor.
Simon Edelsten is co-manager of Artemis Global Selected Fund and Mid Wynd International Investment Trust